Strong pound takes its toll on balance of payments

The first concrete signs that the strong pound has begun to take its toll emerged yesterday, with news that the UK's trade deficit widened sharply in October and November. As Lea Paterson reports, there are also indications that the Far Eastern crisis has begun to hurt UK firms.

The pundits who predicted UK firms could withstand the pressures of the strong pound appeared to have been proved wrong yesterday. The UK's global trade deficit on goods and services rose to pounds 0.6bn in October. This was up pounds 0.2bn from September, and was the highest monthly deficit recorded since July 1996.

"The figures provide a further blow to the theory that UK firms can cope quite comfortably with the strong pound," Jonathan Loynes, at HSBC Greenwell, said.

Preliminary indications are that the November deficit will be even worse. The Office for National Statistics estimates that the deficit in goods traded with non-European Union countries will be pounds 1.1bn, up pounds 0.2bn from October, and the highest since October 1995. "The trend in the UK trade balance is widening," the ONS said.

The market deterioration in the non-EU trade balance in November was attributed by many economists to continuing difficulties in the Far East. "Today's data suggest an Asian effect is coming through," said economists at ABN Amro. "Exports to Asia are weakening significantly as demand collapses," agreed Adam Cole of HSBC James Capel.

The trade deficit on goods alone widened to pounds 1.4bn in October, reflecting a combination both of sterling's strength and a levelling off in world- wide demand.

Geoff Dicks, of NatWest Markets, said the figures provided "the first definitive sign that exports are cracking beneath the strength of sterling and/or early evidence of a slowdown in world demand".

A deterioration in the UK trade balance has been predicted by economists for some time. Indeed, many were surprised that no concrete signs of a deterioration had come through sooner, especially given the warnings sounded by recent surveys of manufacturers.

"The full force of the laws of gravity, long in abeyance, is now being felt," Mr Dicks said.

But the UK's trade balance is, by historical standards, still remarkably healthy. Economists are predicting that, even with further deterioration in December, the UK's balance of trade will remain in surplus for the year as whole.

And although a balance of trade deficit is forecast for 1998, this is not anticipated to be as large as the shortfalls that typically accompany UK boom times. Some economists are sceptical that the figures will persuade the Bank of England to ease off on interest rate policy.